How to prevent the collapse of Armenia`s IT sector - expert 

ArmInfo. Since 2022, Armenia's IT sector has experienced significant growth, largely attributed to  an inflow of re-locants from Russia. During this period, the sector has become a key contributor to GDP growth, accounting for 1-3 percentage points. But recent data from the last two quarters show a concerning picture, indicating that currently the sector is encountering serious problems.  

To understand the reasons behind this and explore potential solutions  to prevent a decline from its current strong, Aghasi Tavadyan,  Associate Professor at the Armenian State Economic University and  economic analyst, shares his insights on his Facebook page.  A

ccording to data from the State Revenue Committee,  in 2019 88.3% of  taxpayers in the IT sector were registered citizens of Armenia.   However, by 2022 this number has decreased to 52.8% and further  dropped to 48.4% in 2023. The data for the first half of this year  shows a significant decrease to 12.6%. Tavadyan specifies that by the  end of the first half of 2024, the number of IT companies with local  registration had decreased from 5163 to 1174 (4.4 times), while IT  companies with foreign registration recorded a sharp increase from  5511 to 8180.

However, as the economist notes, these figures contradict the  dynamics of the number of employees. The number of employees of  companies registered in Armenia decreased by only 5.5%, and this  discrepancy may indicate several scenarios - data inaccuracies, mass  closure of small businesses or a change in registration status.   According to the CAG data,  in 2019 88.4% of IT employees worked in  local companies. By the end of 2022, this percentage decreased to  83.5%, and by the end of the first half of 2024, it dropped futher to  82.7%. This means that companies registered in Armenia have an  average of 24.5 employees, while companies with foreign registration  have only 0.74 employees on average.  

This significant difference, according to the expert, may indicate  the existence of multiple "postal companies". Most likely, in the  first half of 2024, the "postal companies" registered by RA citizens  were closed and reopened by foreign citizens. Such companies exist  mainly on paper for tax or legal purposes, but have practically no  real activity.  

In addition, the average salary in the industry in 2018-2019 was  about 550-600 thousand drams. By 2022, this figure had risen to 700  thousand drams, in 2023 and 2024 it increased to 1-1.1 million drams.  "The peak of wage growth and the number of employees came at the  beginning of 2023. The sharp growth began in early 2022, coinciding  with an influx of migrants from Russia.  

However, the growth rate has slowed down over the past year,"  Tavadyan noted. The decision to establish IT companies in Armenia was  not based on the country's internal advantages, but rather on its  membership in the EAEU. This membership guarantees free movement of  labor, capital, goods and services between the member states of the  union, the expert specifies.

What does the taxpayer list "cover"?

There are a number of interesting trends in the list of the largest  taxpayers in the IT sector, Tavadyan notes.  In January-June 2024, 79  IT companies were included in the list of 1,000 major taxpayers,  which provided the state budget with AMD 45.9 billion in revenue.   This amount is AMD 123 million less than in the same period of 2023.   The contribution of IT companies to total tax revenues decreased from  4.8% to 4.4%.  Synopsys Armenia tops the list with 12% of the income  tax paid (AMD 1.1 billion). However, eight of the 20 largest  taxpayers in the IT sector have decreased tax payments. Particular  decrease was recorded at Veeam Armenia, Vmware, DataArt  and EPAM,  which is mainly due to a decrease in income tax.

The reasons for the decline of the IT sector

Revaluation of Armenian Dram, Revision of tax policy The Cost of  Living in Yerevan Capital outflow

Long-term implications and opportunities 

According to the economist, the current situation in the IT sector  indicates the need to review its development strategy. The influx of  IT professionals in 2022 was temporary and should not be the basis  for long-term policy. The government's focus on tax collection as a  key indicator could jeopardize the long- term strategy of tax relief  necessary for sustainable GDP growth.  In this regard, the economist  suggests reviewing  tax policy.  

Relaxing the tax burden could help during an economic downturn.  Meanwhile, the government, aiming to ensure further growth of tax  revenues, is tightening tax administration and considering  introducing  new types of taxes or increasing existing tax rates. The  expert is confident that this approach may have negative  consequences. The famous concept of the Laffer curve in economics  demonstrates that a continuous increase in the tax burden beyond a  certain point can result in a decrease in tax revenues. This can  occur because high taxes may encourage the shadow economy or reduce  economic activity.

Tavadyan also suggests that Vanadzor  be considered as an IT hub. He  believes that  city's strategic location between Yerevan and Tbilisi  can be used to attract IT specialists through tax incentives.  To  address the situation in the right direction, the economist proposes  taking control of the "management of the exchange rate". "Strong  currency has a negative impact on the IT sector and export potential,  while devaluation can stimulate the growth of public debt and capital  outflow. This is why there is confusion over the Central Bank's  interest rate cuts in conditions of almost zero inflation. This issue  deserves a separate analysis," he notes.  

The authorities should also think about providing affordable housing.  Although capital inflows have mostly come from housing construction,  the issue still needs to be addressed.  "The coming months will be  crucial for the future of Armenia's IT sector," summarizes Aghasi  Tavadyan.